Inspector General’s Message
to Congress

O

ur Nation’s government
depends on an effective and efficient tax system.As the demand for Federal resources grows, it
is important that Americans have faith that their tax dollars are fairly and
accurately assessed, and that tax laws are administered effectively.The Treasury Inspector General for Tax
Administration (TIGTA) is charged with ensuring that these responsibilities are
met, and I remain dedicated to upholding this important mission.

I
am proud of our accomplishments and pleased to present TIGTA’s Semiannual
Report to Congress.This report
highlights notable audit and investigative work conducted between October 1,
2006, and March 31, 2007, and summarizes the statistical results of our
work.Over the last six months, TIGTA
has completed 62 audits that identified more than $5.8 million in total cost
savings and more than $541 million in increased or protected revenue.

The
Internal Revenue Service (IRS) continues to face many challenges.Recent initiatives to improve tax compliance,
including the use of private collection agencies, implementing last-minute tax
law changes for the 2007 filing season, and unique situations, such as the
one-time telephone excise tax refund, have reinforced my priorities for
TIGTA.They include:enhancing our ability to protect tax
administration from corruption; monitoring IRS initiatives to improve tax
compliance; and overseeing IRS efforts to modernize technology.

As
the IRS attempts to close a portion of the estimated $345 billion tax gap
through its Private Debt Collection Program, it is critical that contractor
performance and accountability be effectively managed.To that end, the IRS has effectively
developed and implemented several aspects of the program.Specifically, our audits found that
contractor employees have been adequately trained and background investigations
have been completed within established guidelines. The IRS resolved most computer security
concerns prior to cases being assigned to the private collection agencies;
however, improvements could be made to better enhance computer security.We will continue to actively monitor the
progress of this program to ensure the protection of taxpayers’ rights and the
security of sensitive information.

The
IRS is entrusted with sensitive personal and financial information for millions
of taxpayers.Increased reports of
identity theft from both the public and private sectors have emphasized the
importance of protecting taxpayer data.A recent TIGTA audit estimated that among 490 IRS laptops reported lost
or stolen between January 2003 and June 2006, some may have contained the
personal information of approximately 2,300 taxpayers.In light of this significant concern, TIGTA
recommended that the IRS alter its incident response procedures and implement a
systemic disk encryption program for all laptops.

The
loss or theft of this equipment poses a significant risk to the IRS and
potentially to taxpayers.TIGTA is
focused on ensuring that IRS employees are aware of their security
responsibilities and the need to immediately report the loss or theft of
information technology equipment.TIGTA
and the IRS have enhanced existing processes and information management systems
to improve TIGTA’s ability to investigate and recover this equipment.TIGTA’s Office of Investigations and the IRS
are also producing an employee training video that highlights the risks of
handling sensitive information outside controlled environments.The video emphasizes security awareness and
the timely reporting of lost or stolen equipment to both TIGTA and the IRS.

As
an essential part of its mission, TIGTA is also concerned about protecting the
system of tax administration from disruption.In June 2006, the IRS National Headquarters building was flooded with
over 20 feet of water.The IRS responded
by implementing a business resumption protocol.TIGTA found that the flood had no measurable impact on tax
administration and that sensitive data stored in the basement area were
adequately protected.However, more than
2,200 employees in the building were displaced, costing the IRS millions of
dollars in administrative leave costs.TIGTA recommended that the IRS expand its telecommuting participation by
increasing the availability of laptop computers as an additional component of
its emergency contingency plan.

The
TIGTA Inspections and Evaluations staff began its first year of operation after
a successful pilot project last fiscal year.The staff, which is currently part of our Office of Audit, provides
TIGTA with new capabilities and flexibilities to complement the work of our
audit and investigation functions.As
part of its responsibilities, the staff routinely analyzes data on the tax gap,
supplying valuable information to various stakeholders.

Despite
efforts by the IRS, unauthorized access to confidential tax information (UNAX)
remains a significant problem.During this
reporting period, TIGTA opened 242 new UNAX cases and closed 286 cases, 270 of
which resulted in disciplinary action against IRS employees.Our report highlights some of those
investigations.

In
addition, TIGTA’s Office of Investigations provided fraud awareness
presentations at training conferences and meetings to more than 28,000 IRS
employees and tax practitioners during this reporting period.This outreach has enabled TIGTA to develop
relationships with these groups that assist in identifying corruption within
the IRS and our system of tax administration.

The
IRS continues to face many challenges.TIGTA remains dedicated to working with the IRS, Congress, and other
stakeholders to ensure the effectiveness and efficiency of our tax system.

I
would like to thank the men and women of TIGTA for their outstanding work.They, along with the employees of the IRS,
serve an extremely important function.I
am greatly appreciative of their hard work and service to the American people.

Sincerely,

J. Russell George

Inspector
General

TIGTA's Profile

T

he Treasury Inspector General for Tax Administration provides independent
oversight of Treasury Department matters involving IRS activities, the IRS Oversight
Board, and the IRS Office of Chief Counsel.Although
TIGTA is placed organizationally in the Treasury Departmental Offices and
reports to the Secretary of the Treasury and to Congress, TIGTA functions
independently from the Departmental Offices and all other offices and bureaus
within the Department.

TIGTA’s work is
devoted to all aspects of activity related to the Federal tax system as
administered by the IRS.By identifying
and addressing the IRS’ management challenges, implementing the President’s
Management Agenda and the priorities of the Department of the Treasury,
TIGTA protects the public’s confidence in the tax system.

TIGTA’s
organizational structure is comprised of five functional offices:the Office of Audit (OA); the Office of Investigations
(OI); the Office of Chief Counsel; the Office of Information Technology; and
the Office of Management Services (see chart on page 4).

TIGTA conducts
audits and investigations designed to:

·promote the economy, efficiency, and effectiveness of tax
administration; and

·protect the integrity of tax administration.

.

Organizational Structure

Authorities

TIGTA has all of
the authorities granted under the Inspector General Act of 1978, as amended.[1]TIGTA has access to tax information in the
performance of its tax-administration responsibilities.TIGTA also has the obligation to report
potential criminal violations directly to the Department of Justice.TIGTA and the Commissioner of Internal
Revenue have established policies and procedures delineating responsibilities
to

investigate
potential criminal offenses under the internal revenue laws.In addition, the IRS Restructuring and Reform Act of 1998 (RRA 98)[2]
amended the Inspector General Act of
1978 to give TIGTA statutory authority to carry firearms, execute and
serve search and arrest warrants, serve subpoenas and summonses, and make
arrests as set forth in Section7608(b)(2) of the Internal Revenue Code (I.R.C.).

Promote the Economy, Efficiency and Effectiveness of Tax
Administration

The IRS’ implementation of audit recommendations results in:cost savings and increased or protected
revenue; reduction of taxpayer burden; and protection of taxpayer rights and
entitlements, taxpayer privacy and security, and IRS resources.

Each year, TIGTA identifies and addresses the major management
challenges facing the IRS.TIGTA places
audit emphasis on statutory coverage required by RRA 98, and areas of concern
to Congress, the Secretary of the Treasury, the Commissioner of Internal
Revenue, and other key stakeholders.

The following summaries highlight significant audits that TIGTA
completed in each of the five audit areas of emphasis during this six-month
reporting period.

Tax Compliance
Initiatives

Tax
compliance initiatives include administering tax regulations and collecting the
correct amount of tax for businesses and individuals, and overseeing tax-exempt
and government entities for compliance.Increasing compliance with the tax code is at the heart of IRS
enforcement programs.The IRS is
focusing its casework and enforcement activities to deliver better results and
to better focus on those corporations and high-income individual taxpayers who
fail to report or pay what they owe.

Private
Debt Collection Program

As of September 30, 2006, the gross accounts receivable
to the IRS totaled $271 billion.On
October 22, 2004, the President signed the American Jobs Creation Act,[3] which created a new
I.R.C. Section 6306 (2004) to permit private collection agencies (PCA) to help
collect Federal tax debts.

Overall, the IRS effectively developed and implemented several aspects of
the program, thus providing better assurance that taxpayer rights are protected
and Federal tax information is secure.Specifically, the IRS adequately trained contractor employees, completed
background investigations, established telephone call monitoring and oversight
procedures, and established computer and physical security procedures before
assigning cases.However, the IRS needs
to follow up on computer security issues, update procedures, and update the
application used to calculate projected revenue.

TIGTA recommended that the IRS:

·includes in the Request for Quotation[4] a requirement for
PCAs to maintain Federal tax information on a separate server;

·includes in the Request for Quotation a requirement for
PCAs to provide to the IRS for its review and approval a copy of scripts for
all telephone contacts with taxpayers; and

·continues to update and/or modify the revenue model to
ensure that the IRS appropriately accounts for the impact of: taxpayers who opt
out of the Program; the age of the balance due; and the actual collection rate
achieved.

IRS management agreed with all of the recommendations and is taking
corrective action.

TIGTA
estimates that the IRS could
assess an additional $108 million6 in
Social Security and Medicare taxes each year.As the tax
collector for the Social Security program, the IRS must help taxpayers meet
their tax responsibilities by assessing and collecting the proper amount of
employment taxes in this area.

·the IRS is not assessing
the employer’s share of Social Security and Medicare taxes on unreported tip
income.TIGTA estimated that the IRS
assessed $20 million in Social Security and Medicare taxes on tips for Calendar
Year (CY) 2005, but the IRS could have assessed an additional $20 million.

·the lack of a specific
form or adequately written instructions increases the burden on taxpayers
trying to report Social Security and Medicare taxes on wages.TIGTA estimated that this
additional burden affected about 377,850 taxpayers filing Form 4137 (Social
Security and Medicare Tax on Unreported Tip Income) during
CY 2005.

·many taxpayers appear to
be reporting self-employment income as wages on Form 4137 to pay less Social
Security and Medicare taxes.TIGTA
estimated that the IRS could have assessed an additional $88 million in Social
Security and Medicare taxes on these wages.

TIGTA recommended that the IRS revise Form 4137 to capture the data
necessary to properly assess the employer’s share of Social Security and
Medicare taxes on unreported tip income, revise instructions on use of the
form, and revise IRS training and procedures to reflect the changes.In addition, TIGTA suggested that the IRS use
the revised form to develop a compliance program to assess the employer’s share
of taxes on the unreported tip income.

IRS managers agreed with the findings and recommendations in the
report; however, they did not agree with the proposed corrective actions.In several instances, the IRS proposed its
own corrective actions.TIGTA considered
each of the proposed alternative corrective actions and found each to be
satisfactory. Report
Reference No. 2007-30-062
(Limited Official Use)

Noncash
Charitable Contributions

TIGTA
estimated that 101,236 taxpayers could have claimed unsubstantiated noncash
contributions totaling approximately $1.8 billion for the period January 15
through September 21, 2006.Gifts of donated property, clothing, and
other noncash items have long been a popular deduction for taxpayers.In recent years, the IRS and Congress have
questioned the value placed on some of these noncash donations.As a result, Congress passed legislation
adding reporting requirements to substantiate the value of these
donations.Currently, taxpayers who may
not be entitled to these deductions are reducing their tax liabilities and may
receive refunds whether or not they provide the required substantiation.This could result in a loss of revenue to the
Federal Government and inequitable treatment of taxpayers.

Individual
taxpayers are required to file Form 8283 (Noncash Charitable Contributions) if
their charitable deductions claimed for noncash contributions exceed $500.If the value of donated property exceeds
$5,000, taxpayers are required to obtain signatures on Form 8283, acknowledging
receipt of the donated property, and attest that the value placed on the
donated property was determined by a qualified appraisal.

The
IRS revised tax forms and publications, and provided training and information
to employees to facilitate implementing the new requirements.However, taxpayers and tax practitioners
still need to be better educated about these requirements.The IRS needs to establish additional
procedures to identify noncompliance with these requirements when processing
returns.Once these two needs are met,
the IRS will be better able to address potential noncompliance, as Congress
intended in its legislation.

TIGTA
recommended that the IRS develop a comprehensive outreach plan to address these
requirements for affected taxpayers and tax practitioners.Procedures should be developed to correspond
with taxpayers to obtain missing Forms 8283 and supporting documentation.Taxpayers failing to provide missing forms
and substantiation should have a specific audit code input on their tax returns
to alert the IRS’ Examination function of returns that do not include required
substantiation for noncash charitable contributions.In response to the report, IRS management
agreed with most of the recommendations.

While the IRS effectively managed and monitored implementation of the National
Research Program Study of Subchapter S Corporations, TIGTA noted areas that can
be improved.Some study results may not
be complete, accurate, or provide information sufficient to update existing
return selection formulas.These
concerns could reduce the reliability of the study results.However, the IRS is taking or is planning to
take action to reduce these risks.

The
IRS included oversight and feedback to ensure that, when completed, the study
provides valuable data.However, in 35 of 62 examination cases
that TIGTA reviewed, revenue agents requested unnecessary information from
taxpayers during the examinations.This
included information that was already part of the examination case file or
information that the agents could have obtained using research tools readily
available.In 10 of the 35 cases, the
revenue agent did not fully explain what information was being requested from
the taxpayer.

TIGTA recommended that the IRS issue a reminder to all examiners that
requests for information need to be specific and tailored to each
examination.IRS managers stated that
they will issue a reminder in the Technical
Digest to all examiners that requests for information be specific and tailored
to the examination and that examiners consider taxpayer burden in preparing the
requests.

Modernization of
the IRS includes both computer systems and business structure (reorganization)
modernization.Although both issues have
their own sets of challenges, they must both succeed to fully modernize the
IRS.Business Systems Modernization
(BSM) involves integrating thousands of hardware and software components over
15 years.The BSM program is in its ninth year and has received
approximately $2.3 billion for contractor services.Two of TIGTA’s highlighted audit reports
concern the Electronic Fraud Detection System and the Modernized e-File System.

Electronic Fraud Detection
System

Since TIGTA’s
previous audit,8 the IRS has improved executive oversight
of the Electronic Fraud Detection System (EFDS) project by requiring periodic
reports on the status and risks of the project.Project management controls were also improved.Regular meetings are being held with
stakeholders and contractors to ensure that tasks are on target for timely
completion and risks are addressed.If
tasks are not completed as scheduled, the effect on the overall schedule is
determined and remedial action is taken, if needed.

Although project management controls had
improved, as of December 8, 2006, risks still remained, because several
critical tasks were not completed.For
example:

·the
EFDS (applications and three years of data) needed to be loaded into the
production environment;

·final
integration testing was not completed; and

·the
required Enterprise Life Cycle documents were not prepared.

On April 19,
2006, the IRS stopped all system development activities for the Web EFDS and
focused all efforts on restoring the client-server EFDS for use in January
2007.The restoration effort required
the contractors to prepare the EFDS and related databases for Processing Year (PY)
2007 by starting with the PY 2005 EFDS and updating it with the 2006 and 2007
tax law changes.Therefore, the EFDS
restoration work did not contain the level of complexity involved in
redesigning the EFDS into a Web-based system.

The IRS recently
issued a contract for an estimated amount of $3,080,004 for restoration work to
be performed from November 1, 2006, through February 24, 2007.TIGTA reviewed
the contract and found that payment of the contractor’s fee was not dependent
on the timely delivery of specific EFDS deliverables or milestones.The contract also established a cost
sharing amount not to exceed $3,080,004 as an equitable adjustment amount to
compensate the IRS for the cost to restore the
client-server EFDS.The agreement did not include a provision that would refund the unused equitable
adjustment to the IRS,
and the cost-sharing commitment was exclusively related to delivering a
client-server EFDS in January 2007.

From
TIGTA’s review of the EFDS project work breakdown structure (i.e., a list of all
tasks required to complete the project), it did not appear that the Computer Sciences Corporation (CSC)
had $3,080,004worth of work remaining on the restoration project.The EFDS executive agreed with this
conclusion and stated that CSC verbally agreed to work on two application
changes unrelated to the restoration work to ensure that the IRS would receive
the $3,080,004 equitable adjustment.However, the contract stated that CSC’s cost-sharing commitment was
exclusively related to delivering a client-server based EFDS and did not apply
to any Federal Government-directed scope increases.Therefore, the IRS would be obligated to pay the contractor’s fee if a functional
EFDS was not implemented timely, and the IRS
may not receive the entire equitable adjustment.

The IRS should
ensure that it receives all of the equitable adjustment from CSC.If the entire adjustment is not received by
the end of the original period of performance stated in the contract, the IRS
should request that CSC pay it
the difference between the equitable adjustment amount and the credit the IRS received
during the period of performance.Alternatively, the IRS should request that the application of the
remaining equitable adjustment credit owed to the IRS be applied to invoices
for future EFDS-related task orders or other work being performed by CSC.

IRS managementagreed with the
recommendation and prepared a modification to the task order to ensure
that the IRS received the full equitable adjustment.The modification was signed on February 23,
2007.It extended the base period of
performance and included additional work within the scope of the cost sharing
agreement.

The IRS’ plans
for processing additional tax forms using the Modernized e-File (MeF) system
are uncertain, including plans to schedule development of Form 1040 (U.S.
Individual Income Tax Return), which are pending approval from the Office of
Management and Budget.As a result of
these uncertainties, the IRS:

·has been unable to use fixed-price contracts for the MeF
project;

·has experienced difficulty in managing the project’s
funding and contract accounting; and

·has had delays in negotiations and approvals of the
project’s contracting actions.

TIGTA recommended that the IRS ensure that the MeF project office
involves the Enterprise Service organization’s Business Rules and Requirements
Management Office in its efforts to define release requirements.The requirements definition should
incorporate the concepts and plans of the Information Technology Modernization
Vision and Strategy, and include the content of each release, expected
deployment dates, and anticipated funding for the release work.

TIGTA also recommended that the IRS ensure that the appropriate
congressional committees are promptly notified of any proposed changes to
future modernization program expenditure plans, and identify the cost effects
of deferring significant and material project release requirements or work
segments to future releases.The IRS
should direct the MeF project team to work with the Procurement Office to
finalize the negotiations of work previously completed and clarify the policy for escalating failed
negotiation attempts.

The IRS agreed with most of TIGTA’s recommendations, and corrective
actions are underway.However, the IRS
did not agree to implement a process to identify the cost effect of deferring significant
and material project release requirements to future releases.TIGTA commented on concerns about the
rationale the IRS provided for not using fixed-priced contracts and the absence
of controls to assess the cost effect of deferring requirements to future
releases.

The IRS
continues to face challenges in administering programs focused on tax-exempt
organizations to ensure that they comply with applicable laws and regulations
to qualify for tax-exempt status.While
the IRS has noted that the nonprofit community has not been immune to recent
trends in bad corporate practices that have been highlighted in the for-profit
area, it has only recently begun to concentrate on this area since suffering a
decline in staffing during the late 1990s.

According
to the Congressional Budget Office, nonprofit hospitals received more than $6 billion
in Federal tax exemptions in 2002.The
IRS is conducting a hospital compliance project to assess how tax-exempt hospitals believe they provide a
community benefit in exchange for tax-favored status. Project information may assist the IRS in
differentiating tax-exempt hospitals from for-profit hospitals and could
potentially result in regulatory changes or a Revenue Ruling.

As part of this compliance project, IRS personnel sent a
nine-page questionnaire to 544 tax-exempt hospitals, soliciting information
on compensation practices and the community benefit standard.At the time of TIGTA’s fieldwork, IRS
personnel were still analyzing the questionnaire responses and identifying potential examination of
organizations based on the manner in which they determined executive
compensation.If information gathered in the compliance project shows that hospitals
are taking only minimal action to meet the community benefit standard, the IRS
will consider initiating examinations in this area.Additionally, the compliance project will
gather information about the practices and procedures that tax-exempt
organizations use to assign compensation and promote compliance in this area,
if necessary.

IRS management will prepare two reports summarizing the results of
its analyses
of the questionnaires and related examinations.An interim report, due in July 2007, will present the results of the
tax-exempt hospitals’ responses to the community benefit questions.This report will include any recommendations
for the next steps that are planned to address the community benefit
standard.IRS management plans to issue
a final report publicly in September 2008, summarizing the results of the
tax-exempt hospital compliance project.This report will provide an update on the community benefit standard
since the issuance of the interim report and will include a summary of the
examination results related to excess compensation.

While
the IRS has specific plans for addressing potential noncompliance with the
executive compensation issue, it is still in the process of evaluating the
responses and has not determined what is needed for this issue.Because of the complexity that currently
exists in the industry and the potential for new regulations, TIGTA believes it
is premature to plan for a final project report covering both executive
compensation and community benefit issues.If extensive action is needed to address noncompliance in the community
benefit area, including developing new Revenue Rulings or recommending regulatory
changes, IRS management may need to develop separate plans to accomplish
this.As a result, TIGTA recommended
that the IRS ensure that the interim report includes all planned actions
related to community benefit issues and develop plans to prepare a separate
final report on this issue, if all necessary actions will not be completed for
inclusion in the final compliance report scheduled for September 2008.

IRS
management generally agreed with the recommendation.The interim report will reflect the community
benefit information pertaining to tax-exempt hospitals.However, IRS management stated that it was
too early in the process to determine if a supplemental report on community
benefit was needed or what the precise next steps will be, but agreed to issue
a supplemental report, if necessary.

Millions of
taxpayers entrust the IRS with sensitive financial and personal data stored in
and processed by IRS computer systems.Recent reports of identity theft from both the private and public
sectors have heightened awareness of the need to protect this data.The risks that sensitive data or computer
systems could be compromised and computer operations disrupted continue to
increase.Both internal factors such as
increased connectivity of computer systems and increased use of portable laptop
computers, and external factors such as the volatile threat environment related
to increased terrorist and hacker activity, cause these risks.

Lost and Stolen
Laptop Computers and Other Computer Devices

TIGTA found that
IRS employees had lost at least 490 computers between January 2, 2003, and June
13, 2006.Also, employees did not
properly encrypt data on computer devices, and password controls over laptop
computers were not adequate.The IRS
annually processes more than 220 million tax returns containing personal
financial information and personally identifiable information such as Social
Security Numbers.As a result, it is
likely that sensitive data for a significant number of taxpayers have been
unnecessarily exposed to potential identity theft and/or other fraudulent
schemes.

IRS procedures require employees to report lost or stolen computers to
the IRS Computer Security and Incident Response Center (CSIRC) and TIGTA’s
Office of Investigations.For the period
of TIGTA’s review, employees reported the loss of computers and other sensitive
data in
387 separate incidents.Employees
reported 296 (76 percent) of the incidents to TIGTA, but not to the CSIRC.In addition, employees reported 91 incidents
to the CSIRC, but 49 of these incidents were not reported to TIGTA.Coordination to identify the full scope of
the losses was inadequate between the CSIRC and TIGTA.

TIGTA conducted
a test on 100 laptop computers currently in use by IRS employees and found that
44 laptop computers contained unencrypted sensitive data, including taxpayer
data and employee personnel data.As a
result, TIGTA believes it is very likely that a large number of lost computers
contained similar unencrypted data.TIGTA also found other computer devices, such as flash drives, CDs, and
DVDs, on which sensitive data were not always encrypted.TIGTA reported similar findings in July 2003,9 but the IRS had not taken adequate
corrective actions.

In addition to
encryption solutions to protect sensitive data on its laptop computers, the IRS
requires controls, such as usernames and passwords, to restrict access to
laptop computers.However, for 15 of the
44 laptop computers with unencrypted sensitive data, TIGTA found security
weaknesses that could be exploited to bypass these security controls.TIGTA evaluated the security of backup data
stored at four offsite facilities, and found that, at all of the facilities,
backup data were neither encrypted nor adequately protected.TIGTA noted that inventory controls of backup
media were inadequate, and attributed these weaknesses to a lack of emphasis by
management.

TIGTA
recommended that the IRS:

·refine
incident response procedures to ensure that sufficient details are gathered
regarding taxpayers who are potentially affected by a loss;

·periodically
publicize an explanation of employees’ responsibilities for preventing loss of
computer equipment and taxpayer data, penalties for neglecting these
responsibilities, and a summary of actual violation statistics and disciplinary
action;

·include
a reminder about encrypting sensitive information in the employees’ annual
certification of security awareness, including instructions on using approved
encryption software on electronic media devices, such as flash drives; and

·consider
implementing a systemic disk encryption solution on laptop computers that does
not rely on employees’ discretion about what data to encrypt.

Finally, TIGTA
recommended that the IRS implement procedures to encrypt backup data sent to
non-IRS offsite facilities and ensure that employees assigned to oversee these
facilities conduct an annual inventory validation of backup media and a
physical security check of the offsite facility used to store the media.IRS management agreed with the findings in
the report and has taken, or planned to take, appropriate corrective
action.For two of the recommendations,
the IRS offered alternative corrective action that adequately addressed the
findings.TIGTA concurred with the
planned corrective action.

Background investigations were not completed timely for
IRS and contractor employees.Of the
background investigations that TIGTA sampled within established IRS baselines,
the IRS did not timely complete 77 percent of the IRS employee investigations
and 72 percent of the contractor employee investigations.Delays in processing background
investigations increase the risk that the IRS may be hiring unsuitable
employees and could compromise sensitive taxpayer information, physically harm
employees, and disrupt operations.

Furthermore, temporary bank (lockbox) employees, who
assist at lockbox sites in handling over $360 billion in taxpayer remittances
per year, receive only an annual fingerprint check.In 2005, 54 remittances totaling
approximately $2.8 million were stolen from one lockbox site alone.The IRS is currently working with the
Department of the Treasury Financial Management Service to revise the
requirements for hiring temporary lockbox employees.

One other concern is that background investigations were
not always required for cleaning contractor employees who had access to IRS
office space.Hiring these employees
without performing background investigations increases the risk that unsuitable
individuals will gain access to IRS facilities where taxpayer information is
vulnerable.

The IRS’ process for pre-screening its employees prior to
conducting background investigations was found to be appropriate and
effective.IRS employees were
fingerprinted and preliminary checks were completed prior to the employees
gaining access to IRS facilities and systems.Also, IRS employee background investigations were appropriate for the
level of risk associated with the positions.

TIGTA recommended that the IRS ensure that its management
information system is programmed to track the time expended to process
background investigations.Alerts and
reports to management should be developed to enable management to determine
when and where delays occur to ensure that investigations are completed within
established baselines.In addition,
managers, contracting officials, and system administrators should be reminded
to review documentation verifying that contractor employees have been
pre-screened before they are given access to computer systems.

IRS management stated that action is underway to improve
background investigations of temporary bank employees and cleaning contractor
employees.In addition, IRS management
agreed with the recommendations in the report, and corrective action is
underway.

In
June 2006, the subbasement and basement of the IRS National Headquarters
building in Washington, D.C., were flooded with over 20 feet of
water.Many IRS personnel displaced by
the flood were either unable to telecommute or unable to do so effectively,
which resulted in granting IRS personnel approximately 101,000 hours of
administrative leave.IRS personnel who
work in the Headquarters building are involved with activities that do not
require a significant amount of day-to-day contact with taxpayers.

The
IRS responded by implementing business resumption plans that contain specific
procedures for managing such events.While
the flood displaced more than 2,200 IRS personnel who worked in the building,
TIGTA found that the displacement had no measurable impact on taxpayers and tax
administration.

The IRS needs to
complete a comprehensive assessment of its response to the flooding of the
Headquarters building.The assessment
should capture the overall successes and lessons learned in responding to and
recovering from the flood.Such an
assessment could be useful to IRS officials in the future when faced with a
similar challenge or one of greater magnitude.

TIGTA’s
Inspection and Evaluation Team recommended that the IRS develop a business case
for deciding whether or not to expand telecommuting participation by increasing
the availability of laptop computers to IRS personnel, including comparing the
various costs and benefits associated with replacing desktop computers as they
reach the end of their useful lives with laptop computers.Effective telecommuting could have lowered
the $4.2 million of salary costs associated with the administrative leave.In addition, the IRS should ensure that a
comprehensive analysis is completed and well documented on its overall
performance in responding to and recovering from the flood.

The
IRS agreed that expanding telecommuting participation and the use of laptops
can serve business resumption needs, and noted that it will advocate the
consideration and use of telecommuting as a contingency planning strategy.It will also encourage using laptops in
emergency situations, and recommend that these decisions be included in its
business resumption plans.Additionally,
the IRS indicated that it is finalizing
a document to capture the analysis that was conducted and lessons learned from
the flood.

The flooding at the IRS Headquarters building in Washington, D.C.,
could have resulted in the loss of taxpayer data and disruption in computer
operations.Computer assets were removed from the
building before an asset-tracking system was put in place, and a physical
inventory validation of computer assets remaining in the building could not be
performed while the building was closed.However, due to preparatory and
responsive actions, the IRS adequately protected sensitive data in the
aftermath of the flooding and restored computer operations for its Headquarters
employees.

The
IRS adequately protected taxpayer data stored throughout the building against
the risk of unauthorized access.In
addition, destroyed taxpayer data stored in the basement were properly protected
and disposed of.A little more than one
month after the flooding, the IRS had completed workstation space
arrangements for displaced employees in 15 different locations in the District of Columbia, Maryland,
and Virginia.Within the same time period, unassigned
computers were located for those employees without computers, configured to fit
each employee’s needs, and technical support was provided to allow employees to
reconnect to the IRS network.In
addition, the IRS restored computer infrastructure operations that were
conducted in the Headquarters building prior to the flooding.Critical servers were moved from the
Headquarters building to other IRS facilities and restored for availability to
employees within two weeks after the flooding.TIGTA commends the IRS’ efforts and believes that its actions minimized
the disruption caused by the flooding.

TIGTA
recommended that the IRS ensures that the Incident Management Plans for all IRS
locations include implementing an asset-tracking system immediately after a
disaster.IRS officials agreed with
TIGTA’s findings and have taken appropriate corrective actions.

Since the 1990s,
the IRS has increased delivery of quality customer service to taxpayers.In fact, in its current strategic plan, the
IRS’ first goal is to improve taxpayer service.The Senate Committee on Appropriations has noted that the IRS lacks a
concrete plan to provide adequate alternative services to replace services
proposed for reduction or elimination.In response, the IRS developed a five-year Taxpayer Assistance Blueprint
that will help it focus on providing the appropriate types and amounts of
service.TIGTA continues to identify the
need for improvement in taxpayer services provided through toll-free,
face-to-face, and electronic methods.

Missing and Exploited
Children

On
a quarterly basis, the IRS provides the NationalCenter
for Missing and Exploited Children (NCMEC) with a list that shows which
instructions and publications include which missing children.However, this information is not always
accurate.By enhancing the Picture Them
Home Program and improving the process used to publish pictures, the IRS could
include more pictures of missing children in its printed instructions and
publications.

IRS data could
provide additional value if that data were used to help locate missing children
and/or their alleged abductors.However,
according to 26 U.S.C. §6103,
the IRS is restricted from sharing tax returns or return information.The law provides that tax return information
is confidential and may not be disclosed by the IRS, other Federal and State
government employees, and certain others having access to the information.TIGTA conducted an
analysis of the NCMEC cases that contained Social Security Numbers for missing
children and/or alleged abductors and identified new addresses (i.e., addresses
different from those where the children and/or alleged abductors lived at the
time of the abductions) for 237 (46 percent) of
520 missing children and 104 (34 percent) of 305 alleged abductors.

Disclosure of tax return information to Federal officers
or employees for use in criminal investigations is an exception.The Federal
Bureau of Investigation (FBI) has jurisdiction and investigative
responsibilities over crimes against children, including violations of Federal
statutes relating to kidnappings, such as child abductions, and domestic and
international parental kidnappings.The
law authorizes disclosure of tax returns and return information to Federal law
enforcement personnel such as the FBI if a Federal district court judge or
magistrate grants an ex parte
order.The information, such as taxpayer
identifying information and the sources of income and deductions, could provide
leads to help locate missing children and/or the alleged abductors.

TIGTA
recommended that the IRS ensure that available blank space is consistently
identified and considered for picture placement in all instructions and
publications, and that it develop a process to ensure that management
information accurately reflects which instructions and publications include
which missing children.The IRS agreed
with the recommendations and is taking corrective action.

TIGTA had
several concerns about the
E-Help Desk Program.Examples included:

·customer
satisfaction not being measured;

·quality
measures and procedures not fully established and developed; and

·processes
and procedures not being developed to ensure that predefined solutions are
accurate and current, or that management information is accurate and reliable.

The IRS recognizes
the need to provide customers of its electronic products and services with the
ability to obtain the assistance needed to successfully use these
products.Since the inception of the E‑Help
Desk in 2002, the IRS has continued to identify ways to improve program
efficiency and customer service.However, continued expansion in the availability and use of electronic
products and services requires that improvements are made to ensure that the
program can continue to provide effective customer service.

TIGTA
recommended that the IRS develop:

·a
process to ensure that it timely measures customer satisfaction;

·quality
measures as well as a process to assess progress in achieving the measures;

·processes
and procedures to ensure that predefined solutions10 are accurately developed, timely
monitored, and appropriately approved;

·processes
and procedures to ensure that management information is complete and accurate;
and

·a
process to ensure that assistors complete required training.

IRS
management agreed with all the recommendations in the report and has already
taken action to address them.

Most notices
taxpayers receive from the IRS are standardized computer-generated notices
using 12-point Arial font for document headings and 11-point Arial font for
text language.These font sizes for
notices may be too small for taxpayers with vision impairments to read.There is currently neither a systemic process
to routinely provide large print notices for taxpayers who need or desire them,
nor a process or means to capture the number of taxpayers who need or desire alternative
media.Thus, the IRS cannot determine
the population of taxpayers with vision impairments and study the need for more
service options.Although the IRS
provides forms and publications in alternative media, it discourages taxpayers
from filing tax returns in these formats.

The American
Foundation for the Blind reports that there are between 7 million and 10
million people in the United
States who are blind or vision
impaired.The National Eye Institute11 reports that by 2020, the number of
people who are blind or have low vision is projected to increase
substantially.This includes the senior
vision-impaired population that is expected to increase from 7.3 million in
2001 to 14.8 million by 2030.

The IRS provides
tax forms and publications in formats accessible to taxpayers with vision
impairments to help them file their tax returns.These formats include large
print, Braille, and “talking forms.”12The Braille and talking form documents are
accessible to people using special assistive technology, including
screen-reading software, refreshable Braille displays, and voice recognition
software.During FY 2006, the AlternativeMediaCenter
made more than 782 tax forms and 109 publications available in alternative
media.

Currently, the IRS’ national
partners serve as the primary source of information about the needs of
vision-impaired taxpayers.Recently the
IRS initiated a program, TAXfacts+, which is a public-private collaborative study designed to
improve the long-term economic well being of Americans with disabilities.In addition, the IRS is undergoing a five-year study, called the Taxpayer Assistance
Blueprint, to improve customer service. However, neither TAXfacts+ nor the Taxpayer
Assistance Blueprint focuses on the needs of
taxpayers with vision impairments. The senior population is expected to double by
2030, and vision loss from eye diseases will increase as
Americans age.The IRS should consider
the challenges that the estimated 71 million senior citizens will have by 2030
when interacting with the IRS to meet their tax obligations.

TIGTA made
several recommendations to the IRS, including:

·considering
the feasibility of providing an interface that would make tax-preparation
software packages

·accessible
through the Free File Web site to blind and other taxpayers with vision
impairments; and

·partnering
with advocacy groups to conduct a study to determine the current

·and
future needs and required services for taxpayers with vision impairments, and
then using the results to develop a long-term strategy to assist taxpayers with
vision impairments.

IRS management
agreed with all of the recommendations.It has taken and has committed to take appropriate corrective action to
address the recommendations.

IGTA’s mission is to help protect the ability of the IRS to collect
revenue for the Federal Government.To
accomplish this, TIGTA’s Office of Investigations (OI) conducts investigations and
proactive investigative initiatives to ensure the integrity of IRS employees,
contractors, and other tax professionals; to ensure IRS employee and
infrastructure security; and to protect the IRS from external attempts to
corrupt tax administration.OI’s
Performance Model (see page 20) emphasizes high-quality investigations relative
to these three areas.

While most Offices of Inspector General focus primarily on fraud, waste,
and abuse, TIGTA’s mission is far more extensive.TIGTA’s statutory mandate includes
responsibility to protect the integrity of Federal tax administration.OI performs a variety of functions to
accomplish this mandate, including:

In November 2004, J. Russell George was confirmed by the U.S. Senate as
TIGTA’s new Inspector General.At that
time, Mr. George identified four priorities for TIGTA.These priorities addressed the tremendous
challenges facing the IRS as the nation moves into the 21st
century.

TIGTA’S Investigative Performance
Model

TIGTA’s Office of
Investigations bases its performance measures on three primary areas of investigation:employee integrity; employee and
infrastructure security; and external attempts to corrupt tax
administration.Each of these three
areas is subdivided into three categories, all designed to support the agency’s
law enforcement goals.

TIGTA promotes the economy, efficiency, and effectiveness of tax
administration, while protecting the integrity of the nation’s tax system.OI’s strategy for accomplishing this important
mission is to conduct high impact investigations that protect the ability of
the IRS to collect the nation’s tax revenue.

The following cases are examples of TIGTA investigations that involve the
protection of tax administration, and were conducted during this reporting
period.

Individual
Indicted for False Personation and Wire Fraud

Bonnie Sharrit was indicted in November 2006 by a Federal Grand Jury in
the U.S. District Court for the District of Massachusetts on three counts of
false personation and ten counts of wire fraud.According to the indictment, Sharrit engaged in a scheme to defraud a
company by billing it for false and unnecessary services and expenses.Sharrit represented to the company that the
company and its principals had certain tax problems resulting in the imposition
of Government liens and levies, and that she could assist in the resolution of
the matters because of her status as an IRS contract auditor and her tax
expertise.Sharrit prepared and sent to
the company numerous fictitious documents concerning the alleged tax issues,
purportedly prepared by various Government agencies, including the IRS.Some of these documents purportedly reflected
that Sharrit made settlement payments to the Government in connection with the
alleged outstanding tax liabilities.As
a result, Sharrit fraudulently induced the company to issue payments to her of
at least $46,687.50, for claimed expenses, hourly wages, and settlement of
outstanding liabilities with various Government agencies.Despite Sharrit’s representations, she did
not pay any of this money to Government agencies and did not perform any
services for the company that involved resolving any alleged tax problems.

Todd Schulze was arrested at his residence in
October 2006 by TIGTA Special Agents.He
pleaded guilty in February 2007 in the U.S. District Court for the Western
District of Wisconsin to impeding the administration of internal revenue laws
by threatening force during a telephone call made from New
York to Wisconsin.According to court documents, an IRS employee
in New York
contacted Schulze about taxes he owed to the IRS.During the recorded conversation with the IRS
employee, Schulze stated, “I’m a little concerned about this because this is
strictly a matter where you want to call to seize my account, and if you do
that, I’ll start killing people and you can record that.”As a result of this threat, the IRS Taxpayer Assistance
area in Madison, Wisconsin was shut down for three and a half
hours.

In January 2007, Antenene Oden was charged with assaulting and impeding an
IRS Senior Tax Resolution Officer and Federal law enforcement officers in the
performance of their official duties.According to the criminal complaint filed in the U.S. District Court for
the Northern District of New York, during a confrontation with an IRS officer,
Oden struck him on the cheek with her forearm, knocking his glasses off.When Federal law enforcement officers
attempted to place Oden in handcuffs, she kicked, screamed, and spit at them.

In December 2006, Walter Helwich was charged in the U.S. District Court
for the Northern District of Illinois, Eastern Division, with corrupt or
forcible interference with the administration of internal revenue laws.According to the indictment, Helwich impeded
and impaired the IRS in carrying out its lawful function to assess and collect
income taxes, penalties, interest, and fines for the United States.Helwich signed and filed purported income tax
returns for four tax years on behalf of “Senior America Estate Planning Trust,”
falsely reported his own income as income of the alleged trust, and claimed
that the trust owed no taxes.He also
signed and filed individual income tax returns for nine tax years on behalf of
himself and for seven years on behalf of his spouse, and falsely reported that
he earned zero gross and taxable income.But, in fact, Helwich had earnings during those tax years, including but
not limited to $739,725.He also
submitted altered documents, frivolous correspondence, and forms to the IRS,
and made false statements to the IRS concerning his gross and taxable
income.In furtherance of the corrupt
endeavor, Helwich passed checks drawn on a closed bank account in purported
payment of outstanding income taxes, penalties, and interest that he owed the
IRS.Between December 2002 and October
2004, Helwich submitted almost 40 checks to the IRS, ranging from a few hundred
dollars to more than $380,000.He
continued to submit checks to the IRS on the closed bank account even after IRS
agents told him the account had been closed.

Individual
Pleads Guilty to Threatening to Murder Federal Employees

Robert Nelson pleaded guilty in February 2007 in the U.S. District Court for
the District of Idaho to threatening to murder Federal employees.According to court documents, on December 6,
2006, Nelson called the IRS office in Boise,
Idaho, and left a voice mail
message in which he threatened to blow up the IRS.The next day, Nelson made a telephone call to
the U.S. Social Security office in Boise,
Idaho, and left a voice mail
message at that office in which he threatened to murder Federal employees with
the intent to intimidate and interfere with them while they were engaged in
their official duties.Nelson admitted
to making the threat to the Social Security office, but denied making the
threat that was left on the voice mail at the IRS.

Individual
Charged with Threatening to Kill IRS Employee

In January 2007, William Kelly was charged in the U.S. District Court for
the District of Oregon with threatening to assault an IRS auditor with the
intent to interfere and impede because of her official duties.According to the criminal complaint, in June
2005, Kelly called the IRS concerning his tax issues and stated to an IRS
employee, “I have told and informed the Internal Revenue Service in previous
phone calls, if any, any messenger, law enforcement agent, agency of the
Internal Revenue Service, touches or messes with any of my property, accounts,
or anything, they will be put to death.”During the call, Kelly also threatened the IRS auditor, who previously
audited his tax returns.The criminal complaint
also indicates that in 1996 and 2001, Kelly made similar threatening statements
involving IRS employees.In March 2007,
Kelly entered into a Pretrial Diversion program.

Bribery investigations continue to be vital in
TIGTA’s attempt to thwart criminal activities that threaten the integrity of
tax administration.Bribe offers impede
the IRS’ ability to properly collect revenue, and if gone unchecked,
substantially undermine the integrity of Federal tax administration.As U.S. President Theodore Roosevelt observed
over a century ago, “There is no crime more serious than bribery.Other offenses violate one law while
corruption strikes at the foundation of all law.”

The IRS has stepped up tax enforcement efforts in
recent years to reduce the tax gap, which is defined as the difference between
what taxpayers owe and what they voluntarily and timely pay.These efforts have resulted in an increase in
desire by unscrupulous taxpayers to resort to bribery to avoid paying taxes
due.In fact, since the beginning of
this fiscal year, the number of investigations of significant bribery
allegations has increased.

The following cases are examples of bribery
investigations conducted during this reporting period.

Individual Sentenced for Paying $5,000 Bribe to IRS Employee

In October 2006, Ming Liou was sentenced for
bribery of a public official in the U.S. District Court for the Southern
District of Ohio.According to court
documents, Liou gave a designer purse and $5,000 to an IRS employee with the intent
to unlawfully influence an official act.Liou was sentenced to 12 months and one day imprisonment, and was
ordered to pay a $10,000 fine and a $100 special assessment.

Taxpayer Indicted for
Bribing IRS Revenue Officers

Yan Borr was indicted in February 2007
for bribing a public official.According to court
documents filed in the U.S. District Court for the Eastern District of New
York, Borr gave U.S.
currency to a person acting on behalf of the IRS with the intent to influence
an official act.During several
meetings, Borr and IRS Revenue Officers (RO) discussed his outstanding tax
liabilities.Borr indicated that he
could not fully pay the outstanding tax liabilities, which were approximately
$15,000 as of that date, and indicated that he had a couple of “bonds” that he
could cash and give to the RO, if the RO could take care of his situation.At another meeting, Borr met with another RO
and gave the RO an envelope containing $1,000, in exchange for reducing his tax
liability from approximately $22,000 to approximately $8,500.Borr then offered and gave the RO an
additional $500 to reduce the tax liability by an additional $2,000.

Individual
Sentenced for Bribery of IRS Representative

In December 2006, a U.S. District
Court Judge in the Middle District of Florida, Tampa Division, sentenced Diana
Hong to 12 months and one day probation, and ordered her to pay a $100
assessment, for bribery of a public official.According to the indictment, Hong gave $1,500 to an IRS representative
for the delivery of a “no change” letter concerning her sister’s 2002
individual income tax return.

Improve Tax Compliance
Initiatives

The
tax gap threatens the integrity of our voluntary tax system.It requires a concerted effort to identify
and address individuals within the IRS who play key roles in the collection of
Federal revenue and interaction with external stakeholders.OI has worked diligently to make contact with
and educate large segments of the IRS workforce and other external entities
about preventing fraud in the tax system.By doing so, TIGTA has developed relationships with these groups that
assist in identifying crimes against the IRS and taxpayers.This results in increased reports of bribery,
UNAX, and other offenses that undermine effective tax administration.During the reporting period, TIGTA provided
presentations to more than 28,000 IRS employees, and external entities,
including tax professional organizations, and briefings for entities within the
IRS, such as the Office of Employee Protection and the Office of the
Commissioner of Internal Revenue.For
example, OI has provided integrity and fraud awareness presentations to Revenue
Officers and Revenue Agents at their Continuing Professional Education (CPE)
conferences.During the reporting
period, OI provided 97 awareness presentations to 2,115 Revenue Officers and
227 integrity and awareness presentations to 5,224 Revenue Agents.

Additionally,
OI’s outreach strategy includes an effort to partner with the tax preparer and
practitioner community in preventing fraud in the tax system.OI worked to educate tax professionals by
providing 151 awareness presentations to 9,848 tax practitioners and preparers
at professional conferences during the reporting period.

The following
are examples of cases conducted during this reporting period that involved
particularly egregious fraudulent activity.

Individual Sentenced for
Stealing IRS Refunds from Soldiers and Families

After pleading
guilty to one count of theft of public money, Clarence G. Maxwell III was
sentenced in December 2006 in the U.S. District Court for the Western District
of Texas, Austin Division, to five years probation, and was ordered to pay
restitution of $11,276.51 and a $100 assessment.According to court documents, Maxwell was
assigned to the FortHoodTaxCenter to assist soldiers
and their families in preparing and filing Federal income tax returns.From March 2005 through May 2005, Maxwell
altered five tax returns that he assisted in preparing by falsely designating
his own personal bank account as the account into which the IRS was directed to
deposit the claimed tax refunds, all without the knowledge or authorization of
the taxpayers.As a result of his
scheme, Maxwell caused the IRS to deposit in excess of $11,000 into bank
accounts that he possessed or controlled.

Former IRS Employee Indicted for False
Personation and Bank Fraud

In December
2006, former IRS employee Jacqueline Exum was indicted in the U.S. District Court
for the Western District of Tennessee for false personation, bank fraud, and
bankruptcy fraud.According to the
indictment, Exum pretended to be an IRS employee and devised a scheme to
defraud various banks and credit unions by applying for and receiving a new
Social Security Number (SSN).Using the
new SSN, her original SSN, and variations of them, she applied for credit,
personal loans, and car loans.She used
variations of her maiden name in connection with her new and original SSNs in
an effort to conceal her true identity when applying for loans at financial
institutions.She also created
fictitious SSNs, leave and earning statements, and tax documents, and provided
them to the lending institutions to support her loan applications.In an effort to conceal her fraudulent
scheme, when the loans became delinquent and foreclosure proceedings were
imminent, Exum filed bankruptcy petitions to maintain the vehicles and other
possessions.She received in excess of
$100,000 in cash, merchandise, and loans.

Former IRS Employee Sentenced for Theft of
Government Funds

In January 2007,
Shelly Thompson, a former IRS seasonal employee, was sentenced in the U.S.
District Court for the Eastern District of California to 24 months of
probation, 150 hours of unpaid community service, $5,048 in restitution, and a
$25 assessment.According to the plea
agreement, Thompson caused a tax refund of $5,048, intended for taxpayers, to
be deposited directly into her bank account.She did this by preparing the taxpayers’ 2003 Federal joint tax return,
signing their signatures, and providing her bank account information as the
location to which the refund was to be direct deposited.Thompson did this without the knowledge or
consent of the taxpayers.

Certified Public Accountant
Pleads Guilty to Defrauding IRS and Others of More Than $1.3 Million

In
January 2007, Certified Public Accountant Harry Kyllo pleaded guilty in the
U.S. District Court for the District of Oregon to mail fraud, false
personation, and attempting to defeat payment of tax, all related to a scheme
he devised and intended to devise to defraud the IRS, the Oregon Department of
Revenue, and various clients.According
to court documents, Kyllo instructed his clients to leave the payee line blank
on checks they provided to him to pay their tax liabilities.Kyllo then fraudulently endorsed the checks
and deposited them into one of his own bank accounts for his own use.As part of his scheme, Kyllo told his clients
that he hand-delivered their returns to the IRS, when in fact he did not file
their returns.When his clients received
notices from the IRS indicating that they had outstanding tax liabilities
and/or their returns had not been filed, Kyllo mailed his clients fraudulently
created letters purportedly from the IRS that indicated the problem had been
resolved.To delay discovery of his
fraud, Kyllo prepared false tax returns for his clients and filed them with the
IRS, stopping the IRS from sending notices to his clients.As a result of his scheme, Kyllo caused
losses totaling more than $1.3 million.He also billed and collected fees for his services.

Monitor
Use of Private Collection Agencies

TIGTA continues
to monitor the IRS Private Debt Collection (PDC) Program that is designed to
contract the collection of delinquent Federal tax debts to private collection
agencies, as authorized by the 2004 American Jobs Creation Act (see footnote 3
on page 5).While the use of private
collection agencies could result in significant recoveries of unpaid taxes, the
potential for abuse exists.The law
subjects the collection agencies to the same rigorous taxpayer protection and
privacy rules under which IRS employees currently work.Consistent with TIGTA’s mission of protecting
tax administration, OI continues to play a critical role in implementing the
PDC Program by providing oversight, input, and support to the IRS.

For example, OI
has reviewed documents that the IRS uses to solicit bids from private
collection agencies and monitored the integrity of the IRS procurement process
that led to the award of three collection agency contracts.Additionally, OI participated in the
production of an IRS training video for contractor employees, and provided
presentations and on-site training about TIGTA’s role in the PDC Program to IRS
and contractor personnel.Also, OI’s
Strategic Enforcement Division continued its work with the IRS Computer
Security Incident Response Center (CSIRC) to conduct on-site vulnerability
testing of computer systems maintained by the three PCAs that received IRS
contracts.

Oversee IRS Modernization
Efforts

IRS
efforts to modernize its programs and operations have required a significant
investment of public monies.Currently,
the combined value of active IRS procurements, including each contract’s base
and option years, is approximately $61 billion.OI’s Procurement Fraud Section (PFS), located within the Special
Inquiries and Intelligence Division (SIID), is committed to identifying and
investigating procurement fraud within the IRS.The PFS achieves its goals in this area through proactive and reactive
investigations, fraud awareness presentations, investigative initiatives, and
data analysis.These investigative
efforts relate directly to TIGTA’s core mission of preventing external attempts
to corrupt the IRS’ ability to administer the tax laws effectively.

The IRS
continues its efforts to modernize and expand services to taxpayers by
developing new automated systems.To
date, the IRS has identified more than
260 applications that will be affected by this modernization effort.Because these systems maintain sensitive
taxpayer information, including personally identifiable information (PII), the
IRS is working with TIGTA to ensure that each system will have appropriate
audit trail capabilities.

OI ensures the
privacy and security of taxpayer information by detecting and deterring:

·unauthorized
access to taxpayer information by IRS employees; and

·individuals,
both inside and outside of the IRS, who attempt to gain unauthorized access to
IRS computer systems.

The availability
of these audit trails provides OI with opportunities to identify potential UNAX
violations and properly investigate misconduct.OI’s Strategic Enforcement Division (SED) uses a variety of audit trail
and forensic data analysis tools to proactively identify potential UNAX
violators, and systemic problems and weaknesses.Investigative leads that SED developed are
currently substantiated as actual UNAX violations more than 90 percent of the
time.In this reporting
period, TIGTA opened 242 new UNAX cases and closed 286 cases, of which 14 cases resulted in criminal
prosecutions, and 270 cases resulted in adverse disciplinary action against IRS
employees.

OI
works closely with the IRS to identify incidents involving lost or stolen
Government computers that contain sensitive taxpayer information or PII, and
aggressively pursues the responsible individuals.In response to increased reports of theft of
Government-owned computers over the past year, TIGTA and the CSIRC have worked
together to mitigate any adverse impact on tax administration resulting from
these computer or data thefts.During
this reporting period, the cooperative efforts of both parties resulted in the
signing of a Memorandum of Understanding that includes a process to accurately
report and document lost and/or stolen IRS Information Technology
assets.This immediate notification
process will promote a swift response, and possibly preemptive measures, to
protect sensitive information maintained by the IRS.

SED
was instrumental in identifying UNAX violations in the following
investigations.

In November
2006, former IRS employee Terri Ward was sentenced in the U.S. District Court
for the Eastern District of California to 12 months of probation, a $500 fine
and a $25 assessment, and was ordered to complete 100 hours of unpaid community
service.According to the plea
agreement, while an employee of the IRS, Ward made numerous unauthorized
accesses to inspect private tax return information of individuals without the
authorization of the IRS and/or the individuals.

Former IRS Employee
Sentenced for Unauthorized Access of Computer

In April 2007, former IRS employee Patricia Kraft was sentenced in the U.S.
District Court for the Eastern District of California for tampering with a
witness and unauthorized access of a computer.According to court documents, Kraft intentionally exceeded her
authorized access to the IRS Integrated Data Retrieval System (IDRS) and
obtained tax return information from a tax account of a taxpayer with whom she
had a personal relationship.Kraft also
attempted to offer to forgive a $200 debt owed to her by a family friend if the
friend falsely told law enforcement agents that he had requested previously
filed W-2 Forms and other documents from IRS employees, when he had not done
so.Kraft did this with the intent to
prevent communicating to a law enforcement officer information related to the
unauthorized access to a computer.She
was sentenced to 36 months of probation with the special conditions that she
complete 200 hours of unpaid community service and 180 consecutive days of home
detention, and was ordered to pay a $750 fine and a $125 assessment.

IRS employee
Joanne C. Morado was charged in December 2006 in the U.S. District Court for
the Eastern District of California with five counts of unauthorized inspection
of returns or return information and four counts of fraud and related
activities with computers.According to
a court document, Morado willfully and without authorization, accessed and
inspected the accounts of four private individuals.She also intentionally accessed a computer
without authorization and obtained tax return information of private
individuals from the IDRS.

Former IRS
employee Andrea McNeail was sentenced in the U.S. District Court for the
Western District of Tennessee, Western Division, for intentionally exceeding
authorized access of a computer.According to court documents, McNeail obtained the name and SSN of an
individual by exceeding her authorized access of a computer.She pleaded guilty in July 2006, and was
sentenced in October 2006 to three years of probation with the conditions that
she participate in a home detention program for six months and in career and
academic counseling.McNeail is also
prohibited from receiving any more Federal loans or guarantees.She was also ordered to pay $210.30 in
restitution and a $100 assessment.

Congressional

Testimony

I

nspector General
J. Russell George appeared before Congress twice during this semiannual
reporting period.The following are
summaries of his testimony.

On February 16, 2007, Mr. George testified
before the House Committee on the Budget during its hearing on the IRS and the
tax gap.Mr. George stated that the IRS
has appropriately refocused audit attention on high-income taxpayers.However, this effort has been conducted through
an increase in correspondence examinations rather than face-to-face
examinations.This type of examination
limits the tax issues that can be addressed, he said.Because high-income households typically have
a large percentage of their income that is not subject to third-party reporting
and withholding, it is difficult to determine whether these taxpayers have
reported all of their income.

In addition, Mr.
George stated that in order to improve compliance in business tax filings,
TIGTA has recommended that the IRS establish a comprehensive document-matching
program for the various business documents it receives.

On March 20, 2007, Mr. George submitted
testimony to the House Committee on Ways and Means’ Subcommittee on Oversight
for a hearing on the 2007 tax filing season.Mr. George reported that the number of electronically filed tax returns
continued to increase this tax season; however, the IRS would not meet
Congress’ goal of 80 percent of all returns being filed electronically by
2007.Nevertheless, because the goal has
had a positive effect, TIGTA agrees with the IRS Oversight Board that Congress
should extend that goal to 2012.

Mr. George also
stated that customer service during the tax filing season was
satisfactory.However, he raised concerns
about the one-time refund for the telephone excise tax, which was estimated to
affect between 151 million and 189 million people.He stated that TIGTA was concerned because
many taxpayers were not claiming the credit; and others, who were claiming the
credit, were submitting claims for amounts that were considered to be highly
questionable, but did not meet the IRS’ criteria for further review.

Awards
and Special Achievements

TIGTA Executive Receives Presidential Rank Award

In October 2006,
TIGTA’s Deputy Inspector General for Investigations, Steven M. Jones, received
the Presidential Rank Award for Meritorious Service for his sustained, extraordinary
accomplishments.Each year, the
President recognizes a small group of outstanding leaders in the Senior
Executive Service who achieve results and consistently demonstrate strength in
leadership, integrity, industry, and relentless commitment to excellence in
public service.

Audit

Statistical Reports

Reports with Questioned Costs

TIGTA issued six
audit reports with questioned costs during this semiannual reporting period.13The phrase “questioned cost” means a cost
that is questioned because of:

·an
alleged violation of a provision of a law, regulation, contract, or other
requirement governing the expenditure of funds;

·a
finding, at the time of the audit, that such cost is not supported by adequate
documentation (an unsupported cost); or

·a
finding that expenditure of funds for the intended purpose is unnecessary or
unreasonable.

The phrase
“disallowed cost” means a questioned cost that management, in a management
decision, has sustained or agreed should not be charged to the Government.

Reports With
Questioned Costs

Report
Category

Number

Questioned Costs

(inthousands)

UnsupportedCosts

(inthousands)

1. Reports with no management decision at the

beginning
of the reporting period

9

$165,469

$82,853

2. Reports issued during
the reporting period

6

$5,822

$33

3.Subtotals (Item 1 plus Item 2)

15

$171,291

$82,886

4. Reports for which a
management decision

was made
during the reporting period14

a.Value of disallowed costs

1

$0

$0

b.Value of costs not disallowed

1

$21

$0

5.Reports with no management
decision at the

end of the reporting period
(Item 3 minus Item 4)

14

$171,26915

$82,88515

6. Reports with no management decision

within 6
months of issuance

9

$165,469

$82,853

13 See Appendix II
for identification of audit reports involved.

14IRS
management disallowed only a part of the questioned cost for one report.The value of the disallowed and unsupported
costs was less than $1,000.

15Difference due to rounding.

Reports with Recommendations That

Funds Be Put to Better Use

TIGTA issued no
reports with recommendations that funds be put to better use during this
semiannual reporting period.The
phrase “recommendation that funds be put to better use” means a recommendation
that funds could be used more efficiently if management took actions to
implement and complete the recommendation, including:

·reductions
in outlays;

·deobligations
of funds from programs or operations;

·costs
not incurred by implementing recommended improvements related to operations;

·prevention
of erroneous payment of the following refundable credits:Earned Income Tax Credit and Child Tax
Credit; and

·any
other savings that are specifically identified.

The phrase
“management decision” means the evaluation by management of the findings and
recommendations included in an audit report, and the issuance of a final
decision concerning its response to such findings and recommendations,
including actions concluded to be necessary.

Reports with Additional Quantifiable Impact

on Tax Administration

In
addition to questioned costs and funds put to better use, the Office of Audit
has identified measures that demonstrate the value of audit recommendations to
tax administration and business
operations.These issues are of interest
to Congress, Treasury Department and IRS executives, and the taxpaying public,
and are expressed in quantifiable terms to provide further insight into the
value and potential impact of the Office of Audit’s products and services.Including this information also promotes
adherence to the intent and spirit of the Government Performance and Results Act.

Definitions
of these additional measures are:

Increased Revenue:Assessment or collection of additional taxes.

Revenue Protection:Proper denial of claims for refunds,
including recommendations that prevent erroneous refunds or efforts to defraud
the tax system.

Reduction of Burden on Taxpayers:Decreases by individuals or businesses in the
need for, frequency of, or time spent on contacts, record keeping, preparation,
or costs to comply with tax laws, regulations, and IRS policies and procedures.

Taxpayer Rights and
Entitlements at Risk:The protection of due
process rights granted to taxpayers by law, regulation, or IRS policies and
procedures.These rights most commonly
arise when filing tax returns, paying delinquent taxes, and examining the
accuracy of tax liabilities.The
acceptance of claims for and issuance of refunds (entitlements) are also
included in this category, such as when taxpayers legitimately assert that they
overpaid their taxes.

Inefficient Use of Resources:Value of efficiencies
gained from recommendations to reduce cost while maintaining or improving the
effectiveness of specific programs; resources saved that would be available for
other IRS programs.Also, the value of
internal control weaknesses that resulted in an unrecoverable expenditure of
funds with no tangible or useful benefit in return.

Reliability of Management Information:Ensuring the accuracy, validity, relevance,
and integrity of data, including the sources of data and the applications and
processing thereof, used by the organization to plan, monitor, and report on
its financial and operational activities.This measure will often be expressed as an absolute value
(i.e., without regard to whether a number is positive or negative) of
overstatements or understatements of amounts recorded on the organization’s
documents or systems.

Protection of Resources:Safeguarding human and capital assets, used
by or in the custody of the organization, from inadvertent or malicious injury,
theft, destruction, loss, misuse, overpayment, or degradation.

The number of
taxpayer accounts and dollar values shown in the following chart were derived
from analyses of historical data, and are thus considered potential barometers
of the impact of audit recommendations.Actual results will vary depending on the timing and extent of
management’s implementation of the corresponding corrective actions, and the
number of accounts or subsequent business activities impacted from the dates of
implementation.Also, a report may have
issues that impact more than one outcome measure category.

Reports With Additional
Quantifiable Impact On Tax Administration

Outcome Measure Category1

Number of Reports2

Number of

Taxpayer Accounts

Dollar Value

(in
thousands)

Increased Revenue

1

456,688

$541,124

Revenue Protection

1

$21

Reduction of Burden on Taxpayers

4

378,115

Taxpayer Rights and Entitlements at Risk

2

691

Taxpayer Privacy and Security

1

480

Inefficient Use of
Resources

2

$2,786

Reliability of
Management Information

2

$3,520,000

Protection of Resources

0

1Management
did not agree with the outcome measures in the following reports:

·Taxpayer Rights and Entitlements at Risk:
Report Reference Number 2007-40-053

1 Complaints for which final
determination had not been made at the end of the reporting period.

2 A non-IRS entity includes other law enforcement
entities or Federal agencies.

Note:
The IRS made 50 referrals to TIGTA that would more appropriately be handled by
the IRS, and therefore were returned to the IRS. These are not included in the
total complaints shown above.

Status of Closed Criminal Investigations

Criminal
Referrals1

Employee

Non-Employee

Total

Referred –
Accepted for Prosecution

27

58

85

Referred –
Declined for Prosecution

296

233

529

Referred –
Pending Prosecutorial Decision

52

54

106

Total Criminal Referrals

375

345

720

No
Referral

445

433

878

1 Criminal referrals include both Federal and State
dispositions.

Criminal Dispositions2

Employee

Non-Employee

Total

Guilty

24

39

63

Nolo Contendere (no contest)

0

1

1

Pre-trial Diversion

4

4

8

Deferred Prosecution3

0

0

0

Not Guilty

0

1

1

Dismissed4

1

4

5

Total Criminal Dispositions

29

49

78

2 Final
criminal dispositions during the reporting period.This data may pertain to investigations
referred criminally in prior reporting periods and do not necessarily relate to
the investigations referred criminally in the Status of Closed Criminal
Investigations table above.

3 Generally in
a deferred prosecution, the defendant accepts responsibility for his/her
actions, and complies with certain conditions imposed by the court. Upon the defendant’s completion of the
conditions, the court dismisses the case.If the defendant fails to fully comply, the court reinstates prosecution
of the charge.

4 Court
dismissed charges.

Administrative Dispositions on Closed TIGTA Investigations5

Total

Removed, Terminated or Other

291

Suspended/Reduction in Grade

95

Oral or Written Reprimand/Admonishment

83

Closed – No Action Taken

80

Clearance Letter Issued

100

Employee Resigned Prior to Adjudication

130

Non-Internal Revenue Service Employee
Actions6

251

Total Administrative Dispositions

1,030

5 Final
administrative dispositions during the reporting period.This data may pertain to investigations
referred administratively in prior reporting periods and does not necessarily
relate to the investigations closed in the Investigations Opened and Closed
table.

6
Administrative actions taken by the IRS against non-IRS employees.

Appendix I

Statistical Reports
- Other

Audit Reports with
Significant

Unimplemented
Corrective Actions

The
Inspector General Act of 1978
requires identification of significant recommendations described in previous semiannual
reports for which corrective actions have not been completed.The following list is based on information
from the IRS Office of Management Control’s automated tracking system
maintained by Treasury management officials.

Reference Number

IRS Management Challenge
Area

Issued

Projected

Completion

Date

Report Title and Recommendation Summary

(F = Finding No., R = Recommendation No.,

P = Plan No.)

2001-30-052

Tax Compliance Initiatives

March 2001

12/15/07

Program Improvements
Are Needed to Encourage Taxpayer Compliance in Reporting Foreign Sourced
Income

F-1, R-3, P-1.Ensure that
the ability to record and report trust fund administrative expenses, as
currently envisioned in the IFS development plans, is properly implemented.

2003-10-094

Erroneous and Improper Payments

March 2003

05/15/07

Improvements Are
Needed in the Monitoring of Criminal Investigation Controls Placed on
Taxpayers’ Accounts When Refund Fraud is Suspected

F-1, R-2, P-1.Ensure that
regular reviews of the Questionable Refund Program are conducted to assess
compliance with procedures and that feedback is provided regarding program
effectiveness.Also, analyses of the FraudDetectionCenter’s
control listing data should be analyzed to ensure that reviews are done and
accounts are resolved.

2003-40-139

Tax Compliance Initiatives

June 2003

10/15/07

Opportunities Exist
to Improve the Administration of the Earned Income Tax Credit

Security Over
Computers Used in Telecommuting Needs to Be Strengthened

F-1, R-6, P-1.Require
front-line managers to periodically check their employees’ laptop computers to
ensure that sensitive data are being stored and encrypted properly.

2003-30-176

Tax Compliance Initiatives

August 2003

12/15/07

Interest Paid to
Large Corporations Could Significantly Increase Under a Proposed New Revenue
Procedure

F-1, R-2, P-1.Gather pertinent information concerning the affected proposed
procedure to reduce the length of examinations and interest costs by
conducting a pilot program to demonstrate the actual benefits that could be
achieved.

2003-10-212

Human Capital

September 2003

P-3:09/30/07

P-4:10/01/07

Information on
Employee Training Is Not Adequate to Determine Training Cost or Effectiveness

F-3, R-2, P-3, P-4.Ensure that IRS
training and financial systems can provide information needed for the IRS to
assess its own training efforts.

2004-20-001

Systems Modernization of the IRS

October 2003

12/31/10

Risks Are Mounting
As the Integrated Financial System Project Team Strives to Meet an Aggressive
Implementation Date

F-2, R-1, P-1.Ensure that
the disaster recovery environment is completely built-out and tested.

2004-30-038

Tax Compliance Initiatives

January 2004

07/15/07

Access
to the Toll-Free Telephone System Was Significantly Improved in 2003, but
Additional Enhancements Are Needed

F-3, R-1, P-1.Develop
an Activity-Based Costing system that reliably captures and reports both the total
cost and the cost-per-call of providing services on each toll-free product
line.

2004-30-068

Tax Compliance Initiatives

March 2004

07/15/08

Additional
Efforts Are Needed to Improve the Bank Secrecy Act Compliance Program

Better Use of
the National Account Profile During Returns Processing Can Eliminate
Erroneous Payments

F-2, R-1, P-1.Conduct
studies on the accuracy of EITC claims on tax returns for individuals who
have been claimed for EITC purposes who are 20 or more years older than the
primary taxpayer, or are listed as children that are up to 19 years older
than the primary taxpayer.

2004-20-131

Security of the IRS

September 2004

04/30/12

The Use of
Audit Trails to Monitor Key Networks and Systems Should Remain Part of the
Computer Security Material Weakness

F-2, R-4, P-1.Develop and
implement a reasonable approach for reviewing audit trails over major
applications.

2004-10-182

Using Performance and Financial Information for
Program and Budget Decisions

F-2, R-3, P-1.Consider
allocating rent funds to the operating divisions to help ensure more efficient
use of space and more communication between the facility managers and the
local operating divisions; consider incentives and consequences to ensure
better cooperation.

2005-40-026

Providing Quality Taxpayer Service Operations

February 2005

12/31/10

12/31/10

Processes
Used to Ensure the Accuracy of Information for Individual Taxpayers on
IRS.GOV Need Improvement

F-1, R-1, P-4.Develop a
process to ensure that only authorized personnel have access to IRS.gov
content.

The Disaster
Recovery Program Has Improved, but It Should Be Reported as a Material
Weakness Due to Limited Resources and Control Weaknesses

F-1, R-1, P-1, P-5.Report a
disaster recovery program material weakness to the Department of the Treasury
as part of the IRS’ Federal Managers’ Financial Integrity Act of 1982 annual
evaluation of controls and include any new or currently underway activities
in the corrective action plan.

2005-10-070

Human Capital

March 2005

09/30/07

The Human Resources
Investment Fund is Not a Cost-Effective Method of Providing Tuition
Assistance

F-2, R-1, P-1.Consider
eliminating the HRIF Program and provide tuition assistance through
alternative means, such as the Individual Development Plan process and the Career
Transition Assistance Program.

2005-10-107

Human Capital

July 2005

10/15/08

10/15/08

10/15/07

10/15/08

Improved
Policies and Guidance Are Needed for the Telework Program

F-1, R-1, P-1.Ensure that an
IRS-wide Flexiplace Program policy is developed and implemented that
addresses all the elements recommended by the OPM.

F-2, R-1, P-1.Implement
guidelines to assist managers in evaluating employees’ abilities to
participate in the Flexiplace Program without a loss in productivity.

F-2, R-2, P-1.Ensure that
Flexiplace Program training is provided as needed to help address
productivity concerns.

F-2, R-3, P-1.Assess the
logistical support and equipment needs of Flexiplace Program participants to
help ensure that there is no loss in productivity.

2005-40-110

Providing Quality Taxpayer Service Operations

July 2005

10/15/07

10/15/07

10/15/07

The
Effectiveness of the TaxpayerAssistanceCenter
Program Cannot Be Measured

F-1, R-1, P-1.Enhance the
management information system to capture the number of taxpayers served, the
numbers and types of services provided, and the related resources.

F-1, R-2, P-1.Develop a
Service Delivery Plan for the short-term and long-term direction of the TAC
Program based on business cases and customer input.

F-1, R-3, P-1.Develop a
process that includes routine assessments of TAC operations to ensure that
the TACs are optimally located and that the services provided at the TACs are
the most effective and cost efficient.

2005-10-129

Providing Quality Taxpayer Service Operations

September 2005

05/15/07

03/15/07

Progress Has
Been Made, but Further Improvements Are Needed in the Administration of the
Low-Income Taxpayer Clinic Grant Program

F-1, R-1, P-2.Establish
goals and performance measures for the LITC program to assist the Congress
and IRS in evaluating the success of the program.

F-3, R-2, P-1.Develop a
method to obtain information necessary to verify that clinics are following all
LITC program requirements.

F-1, R-1, P-2, P-3.Develop an overall
compliance strategy for Schedules C with fraudulent refunds, especially when
large volumes of returns are involved.

F-1, R-2, P-2, P-3.Identify
potential computerized methods incorporating possible math error authority to
temporarily stop refunds for cases meeting the characteristics of those in
this scheme or other large Schedule C refund schemes.

2005-10-149

Human Capital

September 2005

04/15/07

09/30/07

04/15/07

The Internal
Revenue Service Does Not Adequately Assess the Effectiveness of Its Training

F-1, R-1, P-1, P-2.Require all
business units to follow the training assessment and develop requirements and
properly document this process.

F-2, R-1, P-1, P-2.Ensure that all
IRS components follow established procedures to evaluate training in order
for the IRS to comply with the training assessment requirement of the Federal
Workforce Flexibility Act of 2004.

Processing Returns and Implementing Tax Law Changes
During the Tax Filing Season

September 2005

04/15/07

04/15/07

The Clarity of
Math Error Notices Has Been Improved, but Further Changes Could Enhance
Notice Clarity and Reduce Unnecessary Notices

F-1, R-2, P-1.Revise tax
statement tables contained on notices to include specific amounts from at
least some line items on which taxpayers made errors on their tax returns.

F-1, R-3, P-1.Revise CP16
to present information in a manner consistent with the other notices sent to
individual taxpayers including the location of the error explanation and tax
statement, and the wording of the taxpayers’ rights to appeal with the math
error adjustment.

2006-30-006

Taxpayer Compliance Initiatives

November 2005

07/15/07

The Internal
Revenue Service Needs a Coordinated National Strategy to Better Address an Estimated
$30 Billion Tax Gap Due to Non-Filers

F-2, R-2, P-1.Consider a
study to devise an effective outreach and education strategy.

F-1, R-1, P-2.Lead a
collaborative effort to identify a workable solution to resolve multiple
identification number use cases where an identification number is used as a
primary identification number on one return and a secondary identification
number on another return.

2006-40-024

Processing Returns and Implementing Tax Law Changes
During the Tax Filing Season

December 2005

04/15/07

Individual
Income Tax Returns Were Timely Processed in 2005; However, Implementation of
Tax Law Changes Could Be Improved

F-3, R-1, P-1.Implement a
computer check that would identify questionable large-dollar entries for
review and resolution for both paper and electronic individual income tax
returns.

2006-40-061

Providing Quality Taxpayer Service Operations

March 2006

10/15/07

10/15/07

The TaxpayerAssistanceCenter
Closure Plan Was Based on Inaccurate Data

F-1, R-1, P-1.Ensure that
data used in the Model or any decision-making tool are accurate and reliable
and have been validated before using them to make decisions regarding the TAC
Program.

F-1, R-2, P-1.Include in
the Model or any decision-making tool data to identify customer
characteristics and capture customer input to effectively measure the impact
any results might have on taxpayer service and compliance.

2006-10-066

Erroneous and Improper Payments

March 2006

04/15/07

09/15/07

06/15/07

The Office
of Professional Responsibility Can Do More to Effectively Identify and Act
Against Incompetent and Disreputable Tax Practitioners

F-1, R-2, P-1.Develop a
process to obtain relevant information on State disciplinary actions by
coordinating with State licensing authorities.

F-1, R-3, P-1.Develop a
method to identify representatives on the Centralized Authorization File that
does not require representatives to use Social Security Numbers on Form 2848.

F-2, R-1, P-1.Implement recommendations
from the prior audit.This should
include employing the case management system to provide data on the use of
program resources and performing an annual workload and staffing analysis to
help prioritize and allocate resources.

2006-50-077

Tax Gap

April 2006

04/15/07

Some
Concerns Remain About the Overall Confidence That Can Be Placed in Internal
Revenue Service Tax Gap Projections

F-1, R-3, P-1.Ensure that
all business unit managers’ operational review requirements are updated to
include a step to validate that all Online Reports Services system-related
reports are certified timely and hold business unit managers accountable for
meeting the security-related responsibilities.

2006-40-109

Hurricane Relief

July 2006

02/15/08

Taxpayers Residing
in the Hurricane Katrina and Rita Disaster Areas Were Accurately Identified
for Tax Relief

The
Electronic Fraud Detection System Redesign Failure Resulted in Fraudulent
Returns and Refunds Not Being Identified

F-3, R-4, P-1.Defer additional
work on the Web Electronic Fraud Detection System (EFDS) until the IRS
decides who will perform the EFDS work.

2006-40-122

Providing Quality Taxpayer Service Operations

August 2006

05/15/07

Customer
Service at Taxpayer Assistance Centers Showed Improvement During the 2006
Filing Season

F-2, R-1, P-2.Develop
guidelines and provide training to TaxpayerAssistanceCenter
managers and assistors on how to manage customer traffic and wait times.

2006-10-124

Tax Exempt Organizations

September 2006

04/01/08

04/01/08

Resource and
Computer Programming Limitations Have Hindered the Progress of the Federal,
State, and Local Governments Office in Identifying Its Customers

F-1, R-3, P-1.Revise
computer programming to ensure that the code used to identify Federal
Government agencies is not deleted if the Form 941 filing requirements are
removed from an agency’s account.

F-1, R-5, P-1.Submit a Request
for Information Services to allow government entities with unique filing
requirement codes, such as Puerto Rican, Virgin Islands, and American Samoa filers,
to be coded as Federal, State, and local government office customers.

2006-40-138

Providing Quality Taxpayer Service Operations

September 2006

P-2:11/15/07

P-3:04/15/08

The Wage and
Investment Division’s Automated Underreporter Telephone Operations Could
Improve Service to Taxpayers

F-2, R-1, P-2, P-3.Increase the
number of bilingual Automated Underreporter (AUR) Program assistors available
to handle the demand from Spanish-speaking taxpayers; revise the AUR Program
tax examiner position description to specifically include telephone duties;
and adopt more precise scheduling and assignment practices.

F-1, R-1, P-1.Ensure that adequate
staffing remains available to monitor the tip agreements for all industries
and use the results of monitoring to measure compliance.

F-2, R-1, P-1, P-2.Prepare a
workforce plan to determine the necessary staffing levels needed to maximize
the Tip Program to accomplish its goals.

F-3, R-1, P-1.Implement
data verification procedures for the transcription of Forms 8027 and give
priority to the identification of potential Form 941 non-filers over the
identification of Form 8027 non-filers.

F-3, R-2, P-1.Ensure that
the SWETRS program remains funded through completion and include the gaming
tip agreements in the Tip Agreement database.

F-4, R-1, P-1.Ensure that
the results of initial testing of the ATIP Revenue Procedure are analyzed,
and consider developing similar Revenue Procedures for small businesses in
other industries to increase the chance of improving tip income reporting
compliance.

F-5, R-1, P-1.Establish an
action plan to monitor progress of the Tip Program.

F-2, R-1, P-1, P-2,
P-3, P-4.Initiate a program providing for the
routine evaluation of employee training activities relative to current
privacy policy requirements and develop a system for tracking and monitoring
these activities.

F-2, R-2, P-1, P-2,
P-3.Reinforce the importance of Privacy Impact Assessment case
documentation with specific instructions or case models and implement a
compliance review process to assess whether IRS business units are adhering
to privacy regulations, given limited resources and staff knowledge in
conducting these reviews.

2006-40-172

Security of the IRS

September 2006

P-1:06/01/07

P-2:05/15/07

Accountability
over Volunteer Income Tax Assistance Program Computers Continues to Be a
Problem

F-1, R-2, P-1, P-2.Integrate the
ITAMS and STARS to link the information between the two and ensure that all
VITA Program computers are properly and efficiently controlled.

2006-20-177

Security of the IRS

September 2006

10/15/07

07/15/07

04/15/07

10/15/08

04/15/08

Improvements
Are Needed to Ensure that the Use of Modernization Applications Is
Effectively Audited

F-1, R-1, P-1.Establish a
review process for CADE audit trails.

F-1, R-2, P-1.Establish a
viable retention policy for CADE audit trails, mirroring, where possible, that
of other systems with taxpayer information.

F-2, R-1, P-1.Reassess the
requirements for SAAS audit trails, including identifying all user
requirements and the resulting SAAS system requirements needed to achieve
them.

F-2, R-2, P-1.Modify
modernized system audit trails to comply with SAAS standards, ensuring that
data collected are valid and arranged in the proper format.

F-2, R-3, P-1.Re-evaluate
SAAS procedures and processes to ensure that the new SAAS requirements are
incorporated and that responsibilities for reviewing modernization audit
trails are adequately defined.

2006-20-178

Security of the IRS

September 2006

01/15/08

Complete
Certification and Accreditation Is Needed to Ensure that the Electronic Fraud
Detection System Meets Federal Government Security Standards

F-3, R-1, P-1.Develop a
Business Impact Analysis for the EnterpriseComputingCenter
– Memphis that places the EFDS at an
appropriate priority among the other major applications residing at the EnterpriseComputingCenter – Memphis.

Other Statistical Reports

The Inspector General Act of 1978 requires Inspectors
General

to address the
following issues:

Issue

Result for TIGTA

Access to Information

Report unreasonable refusals of
information available to the agency that relate to programs and operations
for which the Inspector General has responsibilities.

As of
March 30, 2007, there were no instances in which information or assistance
requested by the Office of Audit was refused.

Disputed Audit Recommendations

Provide information on
significant management decisions in response to audit recommendations with
which the Inspector General disagrees.

As
of March 30, 2007, no reports were issued in
which significant recommendations were disputed.

Revised Management Decisions

Provide a description and explanation
of the reasons for any significant revised management decisions made during
the reporting period.

As
of March 30, 2007, no significant management decisions were revised.

Audit Reports Issued in the Prior Reporting Period
With No Management Response

Provide a summary of each audit
report issued before the beginning of the current reporting period for which
no management response has been received by the end of the current reporting
period.

As
of March 30, 2007, there were no prior reports where management’s response
was not received.

Review of Legislation and Regulations

Review existing and proposed
legislation and regulations, and make recommendations concerning the impact
of such legislation or regulations.

Appendix II

Audit Products

Inspector General Testimony
Before U.S.
House of Representatives Committee on Budget - IRS and the Tax Gap

March 2007

2007-OT-067

Inspector General Testimony
Before Committee on Ways and Means’ Subcommittee on Oversight - 2007 Filing
Season

Audit Products

Reference Number

Report Title

October 2006

2007-20-002

Stronger Management Oversight Is Required
to Ensure That Valuable Systems Modernization Expertise Is Received from the
Federally Funded Research and DevelopmentCenter Contractor

2007-20-003

The Internal Revenue Service Is
Successfully Taking Steps to Transition Modernization Activities from the
PRIME Contractor; However, Difficult Challenges Remain

2007-20-001

The Modernization and Information
Technology Services Organization’s Revised Post Implementation Review
Procedure Can Be Improved (Inefficient Use of Resources: Eliminating the
requirement to perform Post Milestone Reviews will provide over $1 million in
efficiency gains)

Most Compliance Actions Were
Prevented; However, Some Letters Were Sent Inappropriately to Taxpayers Affected
by Hurricanes Katrina and Rita (Taxpayer Burden: 230 instances of
inappropriate compliance actions)

2007-1C-008

Report on Audit of Direct and
Indirect Costs for Contractor’s Fiscal Year 2004 (Company 6)

Report on Audit of Incurred Cost
for Fiscal Year Ending September 30, 2003

2007-1C-018

Report on Audit of Fiscal Year
2007 Forward Pricing Rates

2007-1C-019

Report on Contractor’s Fiscal Year
2006 Labor Floor Checks

2007-1C-020

Report on Audit of the
Contractor’s Fiscal Year 2006 Revised Provisional Rates

2007-1C-021

Incurred Costs Audit for Fiscal
Year Ended June 30, 2004

2007-1C-022

Incurred Costs Audit for Fiscal
Years 2000 through 2003

2007-20-024

Business Cases for Information
Technology Projects Remain Inaccurate (Reliability of Information: $3.52
billion due to inaccurate reporting of project costs, inaccurate measuring of
progress on development projects, and inconsistent reporting of total costs)

2007-20-023

The Internal Revenue Service
Adequately Protected Sensitive Data and Restored Computer Operations After
the Flooding of Its HeadquartersBuilding

2007-40-026

Improvements to the E-Help Desk Are
Needed to Support Expanding Electronic Products and Services (Taxpayer
Burden: 16,101 tax professionals who received incorrect answers; Reliability
of Information: 28,178 E-cases with inadequate documentation to assess the
accuracy of responses provided to customers)

2007-30-027

The National Research Program
Study of S Corporations Has Been Effectively Implemented, but Unnecessary
Information Was Requested From Taxpayers (Taxpayer Burden: 35 requests for
information from taxpayers that contained unnecessary items or were vague.)

February 2007

2007-10-046

Attestation Review of the Internal
Revenue Service’s Fiscal Year 2006 Annual Accounting of Drug Control Funds

The Internal Revenue Service Needs
to Improve Procedures to Identify Noncompliance with the Reporting
Requirements for Noncash Charitable Contributions

2007-1C-040

Report on Compliance with
Requirements Applicable to Major Programs and on Internal Control Over
Compliance in Accordance with the Office of Management and Budget Circular
A-133,
Fiscal Year 2005 (Questioned Costs: $103,560)

Report on the Contractor’s
Information Technology System General Internal Control Follow-up

2007-1C-045

Report on Audit of the
Contractor’s Compliance with Cost Accounting Standard 420, Accounting for
Independent Research and Development Costs and Bid and Proposal Costs

2007-40-047

The Correspondence Imaging System
Helps to Manage Taxpayer Correspondence, but There Are Delays in the Scanning
Process

2007-40-053

The Process to Separate Joint Tax
Accounts for Innocent Spouse Cases Has Been Improved; However, Additional
Actions Are Needed (Revenue Protection: $20,834; Taxpayer Rights and
Entitlements: Refunds to 691 taxpayers not released due to input of improper
codes.)

2007-1C-044

Supplement to Report on Audit of
the Contractor’s Fiscal Year 2003 Incurred Costs (Questioned Costs: $22,099)

2007-10-007

A Statistical Portrayal of Federally
Recognized Indian Tribal Governments’ Tax Filing Characteristics for Tax
Years 2000 Through 2004

2007-30-051

Fiscal Year 2007 Statutory Review
of Compliance with Lien Due Process Procedures (Taxpayer Rights and
Entitlements: 15,847 lien notices untimely mailed and proof of mailing not
located; 60 cases not researched for different addresses.)

2007-40-055

Fiscal Year 2007 Statutory Audit
of Compliance with Legal Guidelines Restricting the Use of Records of Tax
Enforcement Results

2007-20-048

The Internal Revenue Service Is
Not Adequately Protecting Taxpayer Data on Laptop Computers and Other
Portable Electronic Media Devices (Taxpayer Privacy and Security: 480
individuals whose loss of sensitive data could have been prevented.)

2007-40-057

Steps Can Be Taken to Reduce the
Challenges Taxpayers with Vision Impairments Face When Attempting to Meet
Their Tax Obligations

The Private Debt Collection
Program Was Effectively Developed and Implemented, but Some
Follow-up Actions Are Still Necessary

2007-20-059

The Background Investigations
Process Needs Improvements to Ensure That Investigations Are Completed Timely
and Effectively

2007-20-060

Sensitive Data Remain at Risk From
the Use of Unauthorized Wireless Technology

2007-20-052

Oversight of the Electronic Fraud
Detection System Restoration Activities Has Improved, but Risks Remain
(Inefficient Use of Resources: $1.7 million paid to contractors that could
have been avoided if the system was timely implemented.)

2007-10-061

Tax-ExemptHospital
Industry Compliance With Community Benefit and Compensation Practices Is
Being Studied, but Further Analyses Are Needed to Address Any Noncompliance

2007-30-062

Social Security and Medicare Taxes
Are Not Being Properly Assessed on Some Tips and Certain Types of Wage Income
(Increased Revenue: $541 million impacting 456,688 taxpayers; Taxpayer
Burden, 377,850 taxpayers burdened by lack of written instructions.)

Appendix III

TIGTA’s Statutory

Reporting Requirements

TIGTA issued
11 audit reports required by statute dealing with the adequacy and security of
IRS technology during this reporting period.In FY 2007, TIGTA is currently working on the ninth round of statutory
reviews that are required annually by the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98).TIGTA is also working on the annual review
requirement of the Federal Financial Management Improvement Act of 1996
(FFMIA).The following table reflects
the status of the FY 2007 statutory reviews.

Reference to

Statutory
Coverage

Explanation
of the Provision

Comments/TIGTA
Audit Status

Enforcement Statistics

Internal
Revenue Code (I.R.C.)

§7803(d)(1)(A)(i)

Requires TIGTA to evaluate the IRS’ compliance with restrictions under section
1204 of RRA 98 on the use of
enforcement statistics to evaluate IRS employees.

Reference No.
2007-40-055, March 20, 2007

IRS first-line managers
had appropriately not used records of tax enforcement results, or production
quotas or goals, when evaluating employees and considered the fair and
equitable treatment of taxpayers a performance requirement.First-line managers also appropriately
certified that they had not used records of tax enforcement results in a
prohibited manner.TIGTA believes that
the IRS’ efforts to ensure that managers are not using records of tax
enforcement results, or production goals or quotas, to evaluate employees are
generally effective and are helping to protect the rights of taxpayers.

Restrictions on
Directly Contacting Taxpayers

I.R.C.

§7803(d)(1)(A)(ii)

Requires TIGTA to evaluate the IRS’ compliance with restrictions
under I.R.C. § 7521 on directly contacting taxpayers who have indicated
they prefer their representatives be contacted.

Audit fieldwork in
progress.

Filing of a
Notice of Lien

I.R.C.

§ 7803(d)(1)(A)(iii)

Requires TIGTA to evaluate the IRS’ compliance with required
procedures under I.R.C. §6320 upon the filing of a notice
of lien.

Reference No. 2007-30-051, March 20, 2007

The IRS did not comply
with the law in all cases.TIGTA’s
review of a statistically valid sample of 150 Federal Tax Lien cases
identified 142 cases (95 percent) for which the IRS did mail lien
notices timely and correctly, as required by I.R.C. § 6320 and internal
procedures.Four lien notices (about 3
percent) were not sent timely; for another four lien notices (about 3
percent), TIGTA could not determine if the IRS complied with the law, because
the IRS could not provide proof of mailing.When an initial lien notice is returned because it could not be
delivered and a different address is available for the taxpayer, the IRS is
not always meeting its statutory requirement to send the lien notice to the
taxpayer’s last known address.For 60
(15 percent) of the 400 cases, the IRS did not research its computer systems
for the taxpayer’s last known address.These cases could involve legal violations.

Also, the IRS did not always follow its own internal guidelines
for notifying taxpayer representatives of the filing of lien notices.For 15 (60 percent) of the 25 cases in
which the taxpayer had a representative at the time of the IRS lien actions,
the IRS did not notify the taxpayer’s representative of the lien filing.

Extensions of the Statute of Limitations for Assessment of Tax

I.R.C.

§7803(d)(1)(C)

I.R.C.

§6501(c)(4)(B)

Requires TIGTA to include information regarding extensions of the
statute of limitations for assessment of tax under I.R.C. § 6501,and the provision of notice to
taxpayers regarding the right to refuse or limit the extension to particular
issues or a particular period of time.

An evaluation of IRS’ compliance with restrictions under section 3707 of RRA 98on designation of
taxpayers.

Audit fieldwork in progress.

Disclosure of Collection Activities With Respect to Joint Returns

I.R.C.

§7803(d)(1)(B)

I.R.C.

§6103(e)(8)

Requires TIGTA to review and certify whether the IRS is
complying with I.R.C.

§ 6103(e)(8)
to disclose information to an individual filing a joint return on collection
activity involving the other individual filing the return.

Audit fieldwork in
progress.

Taxpayer Complaints

I.R.C.

§7803(d)(2)(A)

Requires TIGTA to include in each of its Semiannual Reports to Congress the
number of taxpayer complaints received and the number of employee misconduct
and taxpayer abuse allegations received by the IRS or TIGTA from taxpayers,
IRS employees, and other sources.

Statistical results on
the number of taxpayer

complaints received are
shown on page 39.

Administrative or Civil Actions With Respect to the Fair
Tax Collection Practices Act of 1996

I.R.C.

§7803(d)(1)(G)

I.R.C.

§6304
Section 3466 of RRA 98

Requires TIGTA to include information regarding any
administrative or civil actions with respect to violations of the fair debt
collection provision of I.R.C.
§ 6304, including a summary of such actions, and any resulting
judgments or awards granted.

Audit
in planning phase.

Denial of Requests for Information

I.R.C.

§7803(d)(1)(F)

I.R.C.

§7803(d)(3)(A)

Requires TIGTA to include information regarding
improper denial of requests for information from the IRS, based on a
statistically valid sample of the total number
of determinations made by the IRS to deny written requests to disclose
information to taxpayers on the basis of I.R.C. § 6103 or 5 U.S.C. § 552(b)(7).

Audit fieldwork in progress.

Adequacy
and Security of the Technology of the IRS

I.R.C.

§7803(d)(1)(D)

Requires TIGTA to evaluate the IRS’ adequacy and
security of its technology.

Information Technology
Reviews:

Reference Number
2007-20-001, October 2006

Reference Number
2007-20-002, October 2006

Reference Number
2007-20-003, October 2006

Reference Number
2007-20-005, December 2006

Reference Number
2007-20-024, January 2007

Reference Number
2007-20-030, March 2007

Reference Number
2007-20-052, March 2007

Security Reviews:

Reference Number
2007-20-023, January 2007

Reference Number
2007-20-048, March 2007

Reference Number
2007-20-059, March 2007

Reference Number
2007-20-060, March 2007

Federal
Financial Management Improvement Act of 1996

31 U.S.C. §
3512

Requires TIGTA to evaluate the IRS’ financial
management systems to ensure compliance with Federal requirements, or establishment
of a remediation plan with resources, remedies, and intermediate target dates
to bring the IRS into substantial compliance.

Audit in report writing phase.

Appendix IV

Section 1203 Standards

In general,
the Commissioner of Internal Revenue shall terminate the employment of any IRS
employee if there is a final administrative or judicial determination that, in
the performance of official duties, such employee committed any misconduct
violations outlined below.Such
termination shall be a removal for cause on charges of misconduct.

Misconduct
violations include:

·Willfully failing to obtain the required approval signatures on
documents authorizing the seizure of a taxpayer’s home, personal belongings, or
business assets;

·Providing a false statement under oath with respect to a material matter
involving a taxpayer or taxpayer representative;

·Violating, with respect to a taxpayer, taxpayer representative, or other
employee of the IRS, any right under the Constitution
of the United States, or any civil right established under Title VI or VII of the Civil Rights Act of
1964; Title IX of the Education Amendments of 1972; Age Discrimination in
Employment Act of 1967; Age Discrimination Act of 1975; Section 501 or 504 of
the Rehabilitation Act of 1973; or
Title I of the Americans with Disabilities Act of 1990;

·Falsifying or destroying documents to conceal mistakes made by any
employee with respect to a matter involving a taxpayer or taxpayer
representative;

·Committing assault or battery on a taxpayer, taxpayer representative, or
other employee of the IRS, but only if there is a criminal conviction or a
final judgment by a court in a civil case, with respect to the assault or
battery;

·Violating the Internal Revenue
Code of 1986, Treasury regulations, or policies of the IRS (including
the Internal Revenue Manual)
for the purpose of retaliating against, or harassing a taxpayer, taxpayer representative,
or other employee of the IRS;

·Willfully misusing provisions of Section
6103 of the Internal Revenue
Code of 1986 for the purpose of concealing information from a
congressional inquiry;

·Willfully failing to file any return of tax required under the Internal Revenue Code of 1986 on or
before the date prescribed therefore (including any extensions), unless such
failure is due to reasonable cause and not to willful neglect;

·Willfully understating Federal tax liability, unless such understatement
is due to reasonable
cause and not to willful neglect; and

·Threatening to audit a taxpayer for the purpose of extracting personal
gain or benefit.

The
Commissioner of Internal Revenue may mitigate the penalty of removal for the
misconduct violations outlined above.The exercise of this authority shall be at the sole discretion of the
Commissioner and may not be delegated to any other officer.The Commissioner, in his/her sole discretion,
may establish a procedure that will be used to determine whether an individual
should be referred to the Commissioner for determination.Any mitigation determination by the
Commissioner in these matters may not be appealed in any administrative or
judicial proceeding.

Appendix V

Data Tables Provided

by the IRS

The memorandum
copied below is the IRS transmittal to TIGTA.The tables that follow the memorandum contain information as provided by
the IRS to TIGTA and consist of IRS employee misconduct reports from the IRS
Automated Labor and Employee Relations Tracking System (ALERTS) for the period
from October 1, 2006, through March 31, 2007.Also, data concerning substantiated I.R.C. § 1203 allegations for the
same period are included.IRS management
conducted inquiries into the cases reflected in these tables.

8The Electronic Fraud Detection
System Redesign Failure Resulted in Fraudulent Returns and
Refunds Not Being Identified (Reference Number 2006-20-108, dated August 9,
2006).

9Security Over
Computers Used in Telecommuting Needs to Be Strengthened (Reference Number 2003-20-118, dated July 2003).

10To ensure the consistency of responses provided to
customers, the E-Help Desk uses a set of predefined solutions for common
problems.

11The National
Eye Institute conducts and supports research that leads to sight-saving
treatments and plays a key role in reducing visual impairment and
blindness.It is part of the National
Institutes of Health, an agency of the United States Department of Health and
Human Services.

12 Talking forms are tax forms that are accessible to Web site
users who have a screen reader and speech recognition software.

1TIGTA Investigations (ROI) - Any matter
involving an employee in which TIGTA conducted an investigation into alleged
misconduct and referred a Report of Investigation (ROI) to IRS for appropriate
action.

2Administrative Case - Any matter involving an
employee in which management conducted an inquiry into alleged misconduct.

3Employee Tax Compliance Case - Any conduct
matter that is identified by the Employee Tax Compliance program which becomes
a matter of official interest.

4Background
Investigation - Any matter involving an NBIC investigation into an employee’s
background that is referred to management for appropriate action.

1 The cases reported as “Removals” and “Penalty
Mitigated” do not reflect the results of any third-party appeal.